Previewing Friday's Big GDP Report: Part I

The coming week is a busy one for economic signals, as we can see in the Weekly Schedule at Calculated Risk. The big news will be Friday’s advance estimate for third quarter GDP.

To prepare for the Friday announcement from the Bureau of Economic Analysis (BEA), here’s a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the per cent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I’ve also included recessions, which are determined by the National Bureau of Economic Research (NBER).

The layman’s rule of thumb is that the onset of a recession can be identified as two consecutive quarters of negative GDP. The NBER has no such rule and makes its recession calls on the basis of a broader set of economic variables. Nevertheless, the correlation between negative GDP and recessions is clearly evident in the chart.

I’ve highlighted the one generally acknowledged double-dip recession over this timeframe. The growth in GDP over the last four quarters makes the NBER’s June 2009 recession end call seem reasonable. However, the downward trend in recent GDP revisions perhaps leaves the door open for a possible double dip.

Mainstream economists, however, at least the 55 who responded to the October Wall Street Journal survey, are virtually unanimous in dismissing the possibility of a double dip. Only one of the 55 forecast negative GDP (-0.3 in Q4 2010 and -1.4 in Q1 2011). Here is a table I created from the survey results. (The full results can be downloaded from the WSJ in Excel format).

The double-dip in the early 1980s was to some extent engineered by the Federal Reserve. Chairman Volcker raised the Federal Funds Rate north of 20% to break the back of the persistent inflation that had plagued the 1970s. The situation today is far different. In 1982 the Boomer generation was on the threshold of its high income years. Today the ageing Boomers are struggling with high unemployment, reduced net worth and the prospect of an underfunded Social Security system. If we do have a double dip, it will probably feel quite different from the early 1980s.

I’ll continue my preview of Friday’s BEA announcement with some additional posts in which I’ll review a few indicators that have given some clues about where GDP is headed.

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